Last week, Babylon Health announced that it had secured a $34.5M interim loan to support ongoing operations as it embarks on a wide-ranging restructuring and re-capitalisation programme. At the same time, the company said it would come back into private ownership next month.
The news comes as the UK-based provider juggles widening net losses, mounting debts and rock-bottom shares, despite burgeoning revenues from its US value-based care (VBC) activities.
The bridging loan and delisting plan are the latest in a stream of efforts by Babylon Health to slash losses and restructure debts with the goal of becoming profitable. Last year the company, which offers virtual, in-person and post-care services in 15 countries, said it aimed to cut annual costs by $100M.
Babylon Health says the interim loan, which is part of a framework agreement with VC firm AlbaCore Capital, will buy it time to implement the restructuring and re-capitalisation programme. The company says the loan will strengthen its balance sheet and provide additional liquidity to support the privatisation plan. Under this plan, Babylon Health’s core operating subsidiaries will be sold to a new entity capitalised by AlbaCore and other investors.
The Signify View
With losses widening, Babylon Health has little option but to take these latest steps in its battle for survival. The company has, over the last two years, tried several different approaches to stem the tide of losses and, in its words, ‘provide sufficient capital for Babylon’s funding requirements through profitability.’
It sold consumer health engagement firm Higi at the end of the last quarter, having acquired it just months previously. The company has also signalled its intention to sell Meritage Medical Network, which has around 700 specialist and primary care physicians and which generates $400M in annual revenues. Babylon also received an $80M private placement 12 months ago (as part of its 2021 IPO) to support the business. It has also made substantial job cuts.
But Babylon’s main problem remains: the soaring costs it faces to provide care services to customers (it provided 5.1M consultations in 2021). Between Q1 2022 and Q1 2023 losses widened to $63.2M from $29.1M. For every dollar Babylon earns, it loses money, a situation also faced by telehealth giant Amwell (which we detail in this Insight).
Babylon’s total Q1 2023 revenues were a healthy $311.1M ($266.4M in Q1 2022), but the faster its revenues grow, the faster its losses are mounting. Achieving scale is coming at a big cost.
This double-edged sword has its roots in a 2021 decision by Babylon Health to shift its strategic focus.
Formed in 2013 in London, the firm cut its teeth with the NHS in the UK. But its presence in that market was unpopular with the predominantly small primary care GPs practices in the country. They were wary of what they saw as a large, VC-backed provider coming in and poaching their young and healthy (ie cheaper to care for) customers, and leaving them with more complex, older and costlier patients.
Realising their UK business was never going to properly scale in that environment, Babylon Health pivoted to the US value-based care (VBC) market in 2021. The decision was quickly vindicated, and this market now accounts more than 90% of the firm’s total quarterly revenues. For example, of its total $289M Q4 2022 revenues, it earned $268M from providing services directly to patients, or by outsourcing services to third-party providers, under Medicaid, Medicare and commercial insurance VBC contracts.
While the rapid uptick in revenues in impressive in and of itself, growth is easy if you’re willing to make a loss to achieve it. Babylon Health’s success in the US VBC market is therefore both a blessing and a curse, especially when it was assumed that by scaling, profits would materialise.
The SPAC Curse
This is not the only strategic curse to have struck Babylon. At around the same time as it was pivoting to VBC in the US, the company decided to list on the US market to cash in on surging demand for its virtual care offerings at the height of COVID. It wasn’t the only vendor to jump on the IPO bandwagon at the time – SOC Telemed (via a so-called Special Purpose Acquisition Company (SPAC) listing) and Amwell (via a traditional IPO) did likewise – believing the hype generated by massively elevated interest in telehealth. History now shows that telehealth companies were overvalued and short-sighted. They listed, the pandemic receded, and virtual care demand growth decelerated. Share prices collapsed, and never recovered.
In Babylon’s case, its listing via a SPAC merger was, in its CEO’s words, a ‘disaster’. A SPAC listing effectively means the target company (e g Babylon) merges with a ‘blank cheque’ company (the SPAC) set up solely to raise capital through an IPO. SPAC listings were trendy in 2020 and 2021. VC firms and investment houses, in particular, found them an attractive vehicle to raise money from the public and then deliver much-needed liquidity to their merger target companies.
And so, during the SPAC boom Babylon Health’s merger with SPAC Alkuri Capital was approved. The deal promised $575M from the listing for Babylon, but things quickly went downhill. Uniquely with this type of listing, even if a merger has been approved by a SPAC’s shareholders, they are able to cash in their shareholdings at any time, including pre-merger.
Unfortunately for Babylon, 90% of Alkuri Capital’s shareholders opted to do just that shortly before the deal went through. Babylon was left with just $275M, a significant shortfall on the original, and its shares fell off a cliff. This then set in motion the chain of events we described earlier in this Insight as Babylon scrambled to recover from the blow.
The SPAC boom was short-lived, and Babylon Health was one of several ‘victims’ of it. The 10% of Alkuri’s investors who chose to keep their money in the business could also be excused for feeling like victims in this too. As Babylon goes private again next month, much of their money will vanish with the deal.
The Long, Lonely Road to Profitability
While its SPAC experience has been serious for Babylon, the company has since fought hard to restructure its debts, raise funds and cut costs to keep heads above water. It has succeeded in the sense that it is still a going concern, and it has an admirable VBC model in the US.
But the path to profitability remains a painful one, and Babylon Health will need deeper costs cuts. But how?
The company’s losses indicate that it is unable to deliver care within the budget of the VBC contracts under which it operates. To do so, it needs to be more proactive and predictive in managing population health; for example, better managing those with chronic conditions, reducing hospital admissions/readmissions, knowing who to screen and ensuring all patients undergo an annual wellness visit.
It also requires investment in better resource care management teams to manage more expensive patients, in better IT to fully understand its populations and facilitate risk stratification, and in population analytics so Babylon knows where to prioritise resource. A long-term investment approach, where losses can be absorbed until financial savings are realised, is needed.
The company has already shed assets that would have helped it offer that more proactive care. Higi was a VBC-geared provider offering BMI and other health screening services in US retail outlets.
There is no doubt that Babylon Health can be a serious disruptor in the US VBC vendor market. But its biggest enemy right now is its own success in quickly growing its customer base, which has led to growing losses.
The bridging loan and the re-privatisation plan buys time, and in a business bleeding money and accumulating debt, time is arguably its most precious commodity right now.